DU SOL B.Com 3rd Year Marketing Management Notes Chapter 6 Pricing Decisions
What do you mean by pricing decisions? Describe their objectives and contents.
Pricing the product is one of the important element in marketing mix. Until recently it has been one of the most neglected areas. Even today, pricing in some firms is simply based on the concepts of cost, market position, competition and necessary profits.
Price is the exchange value of the goods or services in terms of money. The exchange value of product is called price. The value and utility of a product have to be set against its price. When barter economy changed into money economy the importance of price and money grew and they became the soul of exchange of the economy.
In perfect markets price is determined by supply and demand. It takes for granted that there are many buyers and suppliers and that buyers are well informed of the supply available and free to come to the market or go out of the market at will. Perfect competition implies uniformity of price. Price policies are general and long run while pricing strategies are specific and in effect for shorter periods.
Pricing decision means decision of determining price of a product:
A concern has to take a number of factors like cost of production, cost of distribution, cost of storage and transportation, cost of advertisement and personal selling, competitive forces, purchasing power of the consumer etc. other than the demand and supply position of the product in the market.
‘Decision concerning price to be followed for a period of time may be called a Price Decision’.
The price of a product must be determined in such a matter as to offer a rear enable amount of profit to the manufacturer (an enterpreneur), a reasonable remuneration to middlemen and the maximum satisfaction to consumers.
Objectives Or Advantages Of Pricing Decisions:
Some specific objectives of company’s pricing policy may be noted below:
1. To Maximise the Profits.
The primary objective of the pricing decision is to maximise profits for the concern and therefore pricing policy should be determined in such a way so that the company can earn the maximum profits. The concern can do so by exploiting the consumers but such policy can be helpful only in the short run and the concern will lose its standing in the market very soon.
Moreover, competitors will very soon outst him from the market. So, the pricing decision should be taken with a view to maximise the profits for long. For this purpose not so much stress should be laid on price but other non-price factors to increase the sales-(such as advertising, sales promotion, fair distribution of goods, quality of goods etc.) should also be considered.
2. Price Stability.
As far as possible, the prices should not fluctuate too often. A stable price policy above can win the confidence of the consumers. It will also add to the goodwill of the firm. For this purpose, the concern should consider long-run and short-run elements.
3. Competitive Situation.
One of the objectives of the price decision is to face the competitive situation in the market. Prices of the commodities should be fixed keeping in the mind the competitive situation. Sometimes, the management likes to fix a relatively low price for its product to discourage potential competitors.
4. Achieving a Target-return.
This is a common objective of well established and reputed firm in the market (either for the company’s name, or its brand or the quality of the product) to fix a certain rate of return on investment. The prices of the product are so calculated as to earn that rate of return on investment. Different target return may be fixed for different products but such returns should be related to a single overall rate of return target.
5. Capturing the Market.
One of the objectives of pricing decision may be capturing the market. A company especially a big company, at the time of introducing the product in the market fixes comparatively lower prices for its products, keeping in view the competitive position with an objective of capturing a big share in the market. Sometimes, prices are fixed at the lowest ebb which may calculate a loss to the business but the main aim is to capture the market even at a loss at the initial stage. Such type of pricing is possible in a price sensitive market.
6. Ability to Pay.
Price decisions are sometimes taken according to the ability of customers to pay, i.e., more price can be charged from persons having a capacity to pay. Capacity to pay is determined on the basis of the purchasing power of the consumers for which the product is made. Such policies generally followed especially for services such as railways, airlines, doctors, lawyers, etc.
7. Long-run Welfare of the Firm.
The main aim of some concerns is to fix the price of the product which is in the best interest of the firm in the long run keeping the market conditions and economic situations in mind.
8. Margin of Profit to Middlemen.
Pricing of the product should be made keeping in view that middlemen get a fair return on the sale of
company’s product. Otherwise they will lose interest in selling company’s products.
Contents Of Price Decision:
The price decision must include the following :
- Determining the objectives of pricing policy. The objective should t be clear and well defined.
- Studying the various factors affecting the pricing decisions including the cost of production.
- Formulating various formulae for fixing the prices according to the needs of the company.
- Developing a long term pricing policy coordinating all the above factors.
- Considering the economic and social factors in fixing the pricing policy.
Enumerate the factors which affect pricing decisions.
Examine the various factors that must be carefully considered by the sales manager while fixing the price of a product and for minimum resale price maintenance.
Factors Affecting Pricing Decisions:
The following factors may be considered important while taking k a decision for pricing the product:
1. Objectives of the Business.
There may be various objectives of the firm such as getting a reasonable rate of return, to capture the market, maintenance of control over sales and profits etc. (The objectives have been fully discussed in previous question), A pricing policy, thus, should be established only after proper considerations of the objectives of the firm.
2. Cost of the Product.
Cost and price of a product are closely related. Normally, the price cannot or shall not be fixed below its cost (including the product, administrative and selling costs). Price also determines the cost. The product ultimately goes to the public and their capacity to pay will fix the cost otherwise product would be flopped in the market. „
3. Market Position.
The prices of the products of different producers are different either because of difference in quality or because of the goodwill of the firm or because of difference in costs. A reputed concern may fix higher prices for its products and on the other hand, a new producer may fix lower prices for its products. Competition may also affect the pricing decisions.
4. Competitor’s Prices.
Competitive conditions affect the pricing decisions. The company considers the prices fixed and quality maintained by the competitors for their products. It can fix the price equal to or lower than that of the competitors provided the quality of the product, in no case, be lower than that of the competitors.
Even in monopolistic conditions, the producer would have to consider the competition with Substitute products before fixing the prices of his own products. If, suppose, an electric company increases the rate of electricity, the consume-s may shift to kerosene or gas moreover some people may invent other lower priced substitutes.
If cost of production is lower, the prices may be fixed lower to oust the competitors from the market.
Number of competitors also affect the price decisions. If they are few. they can make an association to fix the prices which may be reasonable.
5. Distribution Channels Policy.
The nature of distribution channels used, and trade discounts which have to be allowed to distributors and the distribution expenses also affect the pricing decisions. If channel of distribution is lengthy, the prices will be. fixed higher making an allowance for the distribution expenses made by each middlemen. If on the contrary, channel is short, prices may be fixed lower.
6. Price Elasticity and Demand Elasticity.
Price elasticity affects the decisions of price fixation. Price elasticity means the consequential change of demand for the change in the prices of the commodity. If the demand of the product is inelastic, high prices may be fixed. On other hand, if demand is elastic, the firm cannot fix high prices rather it sho’ Id fix lower prices than that of the competitors. If the demand is highly elastic, the price reduction strategy would pay.
7. Product’s Stage in the Life Cycle of the Product.
Pricing decision is affected by the stage of product in its life cycle, In the introductory stage of the product, it is the price strategy which determines the price of the product. It may be lower to create a demand or may be higher to earn high profits initially under market skimming policy of price fixation. The policy may then lead to slow reduction of prices with a view to expand the market.
In the maturity stage penetrating pricing – the opposite of skimming policy should be preferred. In the obsolescence stage, prices should be reduced to postpone the obsolescence stage.
8. Product Differentiation.
The price of the product also depends upon the characteristics of the product. In order to attract the customers different characteristics are added to the product such as quality, size, colour, alternative uses, etc. and high prices may be charged in a non price sensitive markets. Customers pay more price for the product which is of the new fashion, style, or better quality or packaging, or durability, etc.
9. Buying Patterns of the Consumers.
If the pm chase frequency of the product is higher, lower prices should be fixed to have a low profit margin. It will facilitate increasing the sale volume and the total profits of the firm. All consumer items of daily use have high purchase frequency. Low purchase frequency products are sold at high profit margin and therefore at high prices. Durable consumer items like TV and Refrigerators are priced higher.
10. Economic Environment.
In recession period, the prices are reduced to a sizeable extent to maintain the level of turnover. On the other hand, the price are increased in boom period to cover the increasing cost of production and distribution.
11. Government Policy.
Price discretion is also affected by the price control by the government through enactment of legislation when it is thought proper to arrest the inflationary trend in prices of certain commodities. If producer fixed a high price’, the government, may nationalise the concern. Sometimes, government starts selling that product through fair price shops. So, the prices cannot be fixed higher due to the fear of government action.
12. Social and Ethical Consideration.
Certain social and ethical considerations also affect the price discertion :
(i) Fair Price.
Keeping in mind, the social and ethical aspect, the producers fix the fair price for their products, neither too high to exploit the customers nor too low to have unfairly low return to the business.
(ii) Fear of Labour Leaders.
With the fear of the demand of higher wages and allowances, bonus and better facilities by the labour the producers fix the price at sufficiently low level. It reduces the labour disputes and promotes better labour relations. So the producer should not increase the prices for a short period.
(iii) Consumers Reactions Towards Rising Prices.
A rational consumer also reacts to the rising prices. If the product is elastic, he may put off its use also and consequently the demand of the product will also be reduced. The awakened customers oppose the move of raising the prices through concerted efforts by forming an association for the purpose. So, producers contain the prices.
Thus, the above factors affect price decisions of the producer.
Discuss various kinds of pricing.
Kinds Of Pricing:
Firms may choose various kinds of pricing for their various products. These are :
- Odd pricing;
- Psychological pricing;
- Customary prices;
- Pricing at the prevailing prices;
- Prestige pricing;
- Price pricing;
- Geographic pricing;
- Dual pricing;
- Administered pricing;
- Monopoly pricing;
- Skimming pricing;
- Penetration pricing;
- Expected pricing;
- Sealed bid pricing;
- Negotiated pricing.
We shall discuss each of these prices briefly.
1. Odd Pricing.
It may be a price ending in an odd number or a price just under a round number. Bata Shoe Company pricing one of its pair of shoes at Rs. 29.95 is an example of odd pricing. Such a pricing is adopted by the sellers of speciality or convenience goods. There are certain critical points in pricing. A price just below that would attract buyers as they would feel it is a market down price. But, there is no conclusive evidence that such pricing would increase sales.
2. Psychological Pricing.
The price under this method is fixed at a full number. The price settlers feel that such a price has an apparent psycholgical significance from the view point of buyers. This differs from the concept of odd pricing in that the curve does not necessarily have any segments positively inclined.
3. Customary Prices.
Such prices are fixed by custom. Soft drinks are priced on their customary basis. Such a pricing is usually adopted by chain stores.
4. Pricing at the Prevailing Prices.
This kind of pricing is undertaken to meet the competition. It is also called ‘pricing at the market’. Such a strategy presumes a market in elasticity of demand below the current market price. Price above those of the competitors would sharply bring down sales while a lower price would not significantly increase the sales.
5. Prestige Pricing.
Many customers judge the quality of a product by its price. In their opinion, lower priced product is inferior and higher priced product is superior. Prestige pricing is applied to luxury goods where the seller is successful in creating a prestige for his product.
6. Price Lining.
This policy of pricing is usually found among retailers Technically it is closely related to both psychological and customary prices. Under this policy, the pricing decisions are made only initially and such fixed prices remain constant ever long periods of time. Any changes in the market conditions are met by adjustment in the quality of merchandise. The decision is made with reference to the prices paid for the goods rather than the prices at which it will be sold.
7. Geographic Pricing.
The manufacturer sometimes adopt different prices in different markets without creating any ill-will among customers. Petrol is priced in this way depending on the distance from the storage area to the retail outlet. There are three methods that relate to the absorption of distribution cost in the price.
- FOB Pricing (Free on Board).
It may be FOB origin of FOB destination. In the first case the buyer will have to incur the cost of transit and in the latter, the price quoted is inclusive of transit charges.
- Zone Pricing.
It denotes equality of prices in the same zone. A product will be sold in the South at the same price irrespective of the difference in distance between two places inside the zone.
- Basic Point Pricing.
Basic point pricing fixes the pricing of the product at delivery point. The transportation charges are charged from buyers.
8. Dual Pricing.
When the manufacturer sells the same product at two or more different prices in the same market it is dual market pricing. This is possible only if different brands are marketed. Dual pricing is adopted in Railways where passengers are charged differently for the same journey end travelling in different classes. This is also referred to as ‘discriminatory pricing’.
9. Administered Pricing.
This applies to the practice of pricing the products for the market not on the basis of cost, competitive pressures or the laws of supply and demand but purely on the basis of the policy decisions of the sellers. This kind of price remains unchanged for substantial periods of time.
10. Monopoly Pricing.
New product pricing is in essence monopoly pricing if competition is absent, the seller has a free hand in fixing the price. Such pricing will be on the principles of ‘what the traffic will bear’. Such a price will maximise profits.
11. Skimming Pricing.
Also termed as ‘Skim the cream pricing’ (Stanton). It involves setting a very high price for a new product initially and to reduce the price gradually as competitors enter the market. It is remarked, “Launching o new product with high price is an efficient device for breaking . up the market into segments that differ in price elasticity of demand.'” The idea is that when one is not sure about what price to charge, it is advantageous to begin with too high an initial price and move systematically downwards ft is a self-automatically administered price.
12. Penetration Pricing.
This method is opposite to the skimming method outlined above. Penetration pricing is intended to help the product penetrate into markets to hold a position. This can be done only by adopting a low price in the initial stage or till such time the product is finally accepted by the customers. The method is useful when :
- Sales volume of the product is very sensitive to price.
- A large volume of sales is to be effected.
- The product faces a threat from the competitors.
- Stability of prices is required.
13. Expected Pricing.
In this method, the price that will be accepted by the consumers is found out. Naturally, a fixed price can not be decided beforehand and hence price range is offered. The response of consumers to he price is analysed and later a price is fixed.
14. Sealed Bid Pricing.
This method is followed in the case of specific job works. Government contracts are usually awarded through a system known as tenders or a quotation. Tenders or bids are invited from the propspective suppliers/buyers in sealed covers. The expenditure anticipated is worked out in detail and the competitors offer a price (known as contract price). The minimum price quoted is accepted and the work is awarded to that party.
15. Negotiated Pricing.
The method is invariably adopted by industrial suppliers. Manufacturers who require goods of highly specialised and individually designed nature often negotiate and only then price is fixed.
16. Mark-up Pricing.
The method is adopted by wholesalers and reailers in fixing the price of the product. If wholesalers fixes the price of the product which cost him Rs. 20, at Rs. 25, for sales to retailers. There is mark up price of Rs. 5 or 25%
Demonstrate the practical use of break-even analysis for price setting.
Use Of Break-Even Analysis For Price Setting:
for the practical use of break-even analysis for price setting management must go beyond the break-even computations themselves and etimate the probable sales of various alternative selling prices. For example, as shown in the table below the data where a market has variable costs per unit of Rs. 50 total fixed cost of Rs. 20,000 and is considering four different possible selling prices Rs. 75, Rs. 100, Rs.130, and Rs. 150. At each price the contribution per unit is shown in column 3 and the break-even point in column
If management pricing objective is to maximise profits, it will now choose the price at which the total profits are maximum. In the example, at Rs.150 selling price, the maximum profit is Rs. 17.500 having a total revenue and total costs at Rs.56,250 and Rs.38,750 respectively. The price will be fixed at Rs. 150 per unit.
What are the information needed of price setters?
Attempt a brief note on the information useful for pricing decisions.
Information Needed For Pricing Decisions:
In taking a scientific price decision, certain authentic information is necessary regarding the product, market and the firm. Following information is required for a rational pricing decision :
1. Information regarding the Product The following informations should be collected regarding the product :
- Cost data of the product;
- Excise duty and octroi or any other production tax;
- Government price control regulations, if any;
- Packing requirements of the product; –
- After sale services to be provided to the customers especially in durable consumer products such as TV, Refrigerators, etc.;
- Economic burden of the rejected and seconds goods on the fresh goods.
2. Informations regarding the Markets.
The various Informations regarding the market are :
- Prices of competitors’ products and substituted products;
- Main competitors;
- Production figures of the country;
- Consumption trend of the consumers;
- Terms and conditions of sales;
- Attraction of customers towards the company product or brand loyalty;
- Advertisement and sales promotion activities required to push up the sales;
- Commission or margin of profit to be offered to the middlemen for their services etc.
3. Informations regarding the Firm.
The firm must know the following factors before fixing the prices;
- Production capacity of the plant;
- Firm’s share in the total market;
- Goodwill or popularity of the firm in the market etc.
Some of the above informations may be traced but from the records of the concern. Informations concerning the market and the consumers are to be collected either through various survey techniques to be adopted by the firm or through published secondary data of the government or any other outside agency. Some research institutions also publish their research activities.
Discuss briefly the procedure followed for determining the price of a product.
Write a short note on ‘Pricing Process’.
Process Of Price Determination Of a Product:
For determining the price of a new product, there is no recognised or generally accepted procedure. Generally the following procedure may be followed :
1. Estimating the Demand for the Product.
The first step in determining the price of a new product is to estimate the anticipated demand of the product. However anticipation of demand for a new product is an unhill task but still it can be estimated taking into account the two factors :
- estimated price, and
- estimated demand of the product at different price level. Estimated price can be anticipated on the basis of the relative importance of the product to the consumers in their budget estimates. The estimate of demand at different ‘ rice levels can be fixed on the basis of elasticity of demand of the product. If demand is elastic, the prices may be fixed lower or in case of inelastic demand, prices may be higher.
2. Anticipating Competition.
Having estimated the demand of the product, competitive situation in the present and in future should also be studied. Estimating the future competitive situation is more important in fields where production qf the product can be started with low initial capital and efforts and the profit margin is quite attractive. In such cases, future competition may be very severe. The suty of competition should be made with two angles :
- competition from the producers of similar product, and
- competition from the substitutes of the product. Reactions and activities y. both types of competitors should be made extensively.
3. Determining Expected Share of Market.
The next step v/ill be to determine the market share which a company will try to capture. It depends on various factors such as present production capacity, cost of extension programmes, cost of production and competition, etc. The market share should not be fixed beyond the production capacity of the plant.
4. Selecting a Suitable Price Strategy.
Keeping in view the business objectives in mind, a suitable price strategy should be selected. There are various price strategies to be adopted such as
- Skimming the cream pricing strategy,
- Low penetration pricing strategy,
- Discouraging potential competitors,
- Follow the competition, etc. Each strategy possesses its own merits and demerits. The firm is to select any one of the strategy (Different strategies have been discussed in the next chapter).
5. Companies Marketing Policies. The marketing policies regarding the following aspect should be considered as a next step :
(a) Production Policies.
In determining the prices, the nature of the product, i.e., whether it is a new or old product, perishable or durable consumer or industrial, etc. should also be considered. Product mix is also one of the considerations.
(b) Channels of Distribution.
Channels of distribution also influence the price of the product because the distribution expenses and commission payable to various middlemen form part of the total cost. Prices should also be fixed for wholesalers and retailers separately in order to allow a fair return to them.
(c) Promotional Policies.
Who will perform the promotional function producer or wholesaler and retailer. If promotional functions are allowed to be performed by wholesalers and retailers, then naturally they would ask higher profit margin. If such functions are performed by producer himself, he can fix a lower price of his product. Thus promotional policies affect the pricing of a product.
Pricing Policies And Strategies:
“Decisions concerning price to be followed for a period time
may be called price policies. ” – Converse
How does a pricing strategy differ from a pricing policy ? Discuss the effect of the kind of distinctiveness possessed by a product on its pricing.
Price Policy And Price Strategy:
Marketers try to activate their lung run pricing objectives through both price policies and price strategies. Management utilises price policies to guide itself generally in making pricing decisions over long periods. The pricing decisions management makes to fit the changing competitive situations met by specific products are its pricing strategies.
In this way price policies are general and long run while pricing strategies are specific and in effect for shorter periods. Selling price is a key element in the formulation of pricing strategy and as the competitive situation changes with different stages in the product’s life cycle, the relative amount of freedom, management has in setting prices, also changes.
Pricing Strategy And The Competitive Situation:
Pricing strategies changed with competitive situation. Pricing strategy . is uncontrollable when management is unable to determine prices. At the other extreme in those rare cases where the marketer has a long term monopoly pricing is cent percent controllable.
Monopolist sets his price to maximise profits by “charging what the traffic will bear”, but in the real world, various external pressures prevent him from having a pure monopoly type price. But still he keeps the administered price once set by management and held stable over a long period.
In between cases show pricing as controllable. Pricing becomes a controllable through combination of marketing skill. Most modern marketers differentiate their products hoping to reduce what the buyers have for choosing competitor’s offerings on a price basis. Some use promotion to differentiate their products in buyer’s minds. Also they differentiate total offerings through their individualised choices of marketing channels and middlemen, physical distribution system. Most modem marketers manipulate other controllables to increase their ability to use pricing as controllable.
According to Joel Dean there are three kinds of competitive situations for the product :
- Lasting distinctiveness.
- Perishable distinctiveness.
- Little distinctiveness.
(i) Lasting Distinctiveness –
A product has distinctiveness upto the extent that it could be sold above or below the competitors’ price without changing their prices or sales. But very few products have lasting distinctiveness except diamond if lasting means more than ten years and no substitute exists.
(ii) Perishable Distinctiveness –
In pioneering stage most products have perishable distinctiveness which slowly diminishes in growth and maturity stages. This happens when competitors bring in their products to the innovator’s approximation and when their strategies come .closer to the innovators.
(iii) Little Distinctiveness –
Products of perishable distinctiveness become products of little distinctiveness in market in maturity stage and continue in decline. When any product enjoys lasting distinctiveness which is any rare, the marketer enjoys the monopolists’ pricing freedom.
Describe in brief the main pricing methods which can be followed to determine the price of a product.
Explain the following :
(i) Rate of Return on Investment pricing (Target pricing).
(ii) Cost-plus Method.
Distinguish between :
(a) Cost-oriented pricing.
(b) Demand-oriented pricing.
(c) Competition-oriented pricing.
Differentiate between ‘Cost-plus Method’ and ‘Marginal Cost Price Policies’.
Basic Pricing Policies:
Fundamentals which may affect price decisions are consumer situation and cost considerations. It is quite unfortunate that many firms have no clear pricing policies. The following are the basic policies recognised for pricing :
- Cost-oriented pricing policy.
- Demand-oriented pricing policy.
- Competition-oriented pricing policy.
1. Cost-oriented Pricing Polity –
Following are some of the methods of pricing based on cos :
(a) Cost-plus Pricing –
This pricing method assumes that no product is sold at a loss since the price covers the full cost incurred. Definitely costs furnish a good point from which the computation of price could begin. Fixing a tentative price is easier under this method. The price under this method is determined by adding a desired percentage profit on cost to the total cost of the product taking into account, the margins for middlemen.
But the criticism against this policy is that it ignores completely the influence of competition and market demand. Cost-plus policies are often used by retail traders and in manufacturing industries where the production is not standardised, ‘the method pf pricing is based on simple arithmetic adding a fixed percentage to the unit cost. Thus, the retail price of a particular item might be the manufacturer’s cost plus his gross margin plus the wholesaler’s gross margin plus the retailer’s gross margin. This method is, therefore, also known as the Sum of margins method.
Advantages of Cost-plus Method.
- Where it is difficult to forecast the future demand, this method is appropriate.
- If there are few buyers of the products, pricing can be justified.
- Public utility services like railways, post offices, electricity etc. are priced through this method.
- It is a long-term policy.
Disadvantages of Cost-plus Method.
- The demand and supply forces and competition – the two important factors in fixing the prices – are ignored.
- This method is totally based on cost-concept. But the reality is that costs do not influence the prices whereas prices influence the cost.
- The costs of joints products are only estimated. Correct cost cannot be calculated.
(b) Rate of Return or Target Pricing Method –
Under this method, first of all, an arbitrary desired rate of profit on the capital employed/ invested is determined by the enterprise. The total desired profit is then calculated on the basis of this rate of return. Total desired profit is then added to the total cost of production and thus, the price per unit of the product is determined. In short –
Total Cost of Production + Total desired profit at desired
This method is good only When there is no competition in the market. The rate on investment is decided arbitrarily.
(c) Break-even Pricing –
The break-even analysis helps a firm to determine at what level of output the revenues will equal the costs assuming a certain selling price. For this purpose the cost of manufacture is also divided into two : Fixed and variable costs. Fixed costs (Rent, Rates, Insurance, etc.) theoretically remain constant over all levels of output, variable costs (labour and material) vary with changes in output level. Fixed costs naturally decrease per unit when production increases. Variable co Is, on the other hand change as production ”varies, i.e., no production no variable cost, more production more variable cost.
The break-even point therefore, is a point where there is neither loss for profit. This is found out by using the following equation :
Total Fixed Costs
Margin of contribution = Unit selling price – unit variable costs. This could also be expressed graphically.
In the diagram ‘X’ denotes break-even points at various unit sale prices. The graph shows that at Rs. 60 the firm has to sell 3 units Rs. 70, 2 units; at Rs. 80, 1 unit etc.
Break-even analysis helps to establish prices only when the costs of production remain reasonably constant. Another trouble is found in accurately forecasting demand at various prices.
(d) Marginal Cost or Incremental Cost Pricing –
In this method, the price is fixed on the basis of additional variable cost associated with an additional unit of output. The cost of producing and selling one more unit, i.e., the last unit is taken as the base for the pricing under this method, only variable cost is considered and recovered. Consideration of fixed cost is ignored. The fixed cost will be recovered out of margin (sales-variable cost). It gives the flexibility to recover a larger share of the fixed cost from certain customers or a certain segment of the business and a smaller share from others.
- This method is useful in introductory compaigns, i.e., for introducing a new product where it is felt that this new product should not bear its share in fixed cost. Other products bear the full fixed cost. Thus, this method of pricing is useful when the producer has a number of products product-lines.
- In order to protect the shutdown and keeping the labour force busy in slack seasons this method is also helpful.
- If the product is perishable or where the competitors are weak, this method is useful to sell the perishable product or to oust the competitors.
- The method can be used where break-even point has been achieved.
- The method is particularly useful in quoting for competitive tenders and in export marketing.
- This method cannot be followed indefinitely as its share of fixed cost remains to be unabsorbed and if other products are made to absorb all the fixed costs involved in an organisation, the seller is selling a proportion of his output at incremental cost and the customers of other products are paying a higher price. So, it is a short term policy.
- The producer may lose the market of other products because of the high cost and competitors may drive away the customers.
2. Demand-oriented Pricing Policy –
Under this method of pricing, the demand is the pivotal factor. Price is fixed by simply adjusting it to the market conditions. A .high price is charged when or where the demand is intense and a low price is charged when the demand is low.
The following methods belong to this category of demand based pricing :
(i) What the Traffic can bear Pricing/Purchasing Power Pricing Method – Under this method the price of the product determined on the basis of what the purchasers can bear or pay. What purchasers can pay depends upon their purchasing power. Generally, luxury goods or fashion goods, cosmetics are priced on this basis. It is used more by retailers ather than by manufacturing firms.
This method brings high profits in the short run. But in the long run, this concept is not safe. Chances errors in judgement are very high. Also, it involves trial and error. It can be used where monopoly/oligopoly conditions existand where demand is quite inelastic with respect to price.
- Skimming Pricing See Questions No 3
- Penetration Pricing See Questions No 3
3. Competition-oriented Pricing Policy –
Most companies fix the prices of their products after a careful consideration of the competitors’ price structure. Deliberate policy may be formulated to sell its products in the
competitive market. Three policy alternatives are available to the firm under this pricing method :
(i) Parity Pricing or Going Rate Pricing –
Under this method, the price of a product is determined on the basis of the price of competitors products. This method is used when the firm is new in the market or when the existing firm introduces a new product in the market. This method is used when there is a tough competition in the market. The method is based on the assumption that a new product will create demand only when its price is competitive. In such a.case. The firm follows the market leader.
(ii) Pricing above Competitive Level or Discount Pricing –
Discount pricing means when the firm determines the price of its products below the competitive level i.e., below the price of the same products of the competitors. This policy pays where customers are price, the method is used by new firms ..entering the market.
(iii) Pricing above Competitive Level or Premium Pricing –
Premium pricing means where the firm determines the price of its product above the price of the same products of the competitors. Price of the firm’s product remain higher showing that its quality is better. The ‘rice policy is adopted by the firms of high repute only because they have created the image of quality producer in the minds of the puplic. They became the market leader.
All the above three competitive based methods are not rigid in price- cost relations. Its cost or demand may change but the price of the product remains unchanged. Conversely, the firm changes its price even when there is no change in cost or demand of firm’s products.
Explain the pricing strategy to be used to determine the price of a new product.
Distinguish between ‘skimming’ and ‘Penetration.’
Write a brief note on Skimming the Cream Pricing Policy or Low Penetration Pricing Policy.
Pricing Strategy During Market Pioneering
During market pioneering, marketer’s proper pricing strategy depends both upon how distinctive his new product is and how long he expects this distinctiveness to last. The more the distinctiveness a product possesses the- more freedom in pricing is expected. If it is highly distinctive having no substitute, he can choose profitable price. If it is slightly distinctive with minor changes from existing and substitute products, profitable price is restricted. If distinctiveness is for longer period, the wider range of profitable price can be expected.
New products howsoever distinctive have limited period free of competition. The period depends on innovation, potentiability, the rate at which it gains market acceptance and potential competitor’s product development capability.
During the market pioneering stage, the innovating marketer enjoys enough pricing discretion but he cannot hope to enjoy more than three years freedom from competitors. For most products the marketer must formulate pricing strategy during the market pioneering stage on the assumption that product distinctiveness will deteriorate in a relatively short time as competitors enter the market.
In the market pioneering stage, marketer has three price strategies :
- Skim the Cream Pricing.
- Market-Penetration Pricing.
- Follow the Leader Pricing.
1. Skim the Cream Pricing Strategy or A High Initial Pricing Strategy –
The ‘Skim the Cream Pricing Strategy’ uses a very high introductory price to skim the cream of demand at the very outset. This strategy is adopted when there is no competition in the market or the new product has some exclusive characteristics. Such prices continue to be high till the competitors begin to enter the field.
As soon as competitors enter the market, the producer reduces the prices of his product. This is a method of recovering the product development cost very soon. It is a short-range pricing objectives and is followed when the producer feels that there will be rapid competition in-roads and he wants to take the cream before this happens.
Attraction of Price Skimming –
This policy is attracitve in the following cases :
- In the beginning, there is lack of competition and therefore, innovative company can fix the monopolistic price of its product.
- This policy is suitable especially pricing the luxuary products because it is an index of social status and price sensitivity is less.
- It attracts the prompt return of investment.
- If the price is highly distinctive, it tends to have more price in elastic demand at first then it will be reduced later on, because advertising and personal selling have more influence on sales than price does during a products market pioneering stage.
- A high introductory price divides the market into segments differing in their responsiveness to price – the skimming price taps the market segment that is relatively insensitive to price. Later price reduction can reach more price conscious market segments.
- If an introductory price is too high, it is easy to reduce but if it is too low it is difficult and awkward to raise.
- A high introductory price often generates greater rupee sales and profits than a low introductory price – thus price skimming provides funds, the marketers can use later in expanding sales to other market segments.
- Price skimming gives the innovation marketer a chance recoup his product development expenses before competitors whose product development expenses should be lower to enter the market.
2. Market Penetration Pricing –
This is just opposite of the ‘Skim the Cream’ technique. It offers a very low introductory price to speed up its sales and therefore widening the market base. Low price is used as a major tool for rapid penetration of a mass market and is based on a long-term view point. It aims at capturing the market. If, there is alreadya competing product, its aim may be to capture a share of the market from a company-product which the new product it is hoped will replace. It also discourages competitors from entering the market.
Conditions Making Penetration Pricing Appropriate-
Management should seriously think using penetrating pricing under any or all of four different conditions :
- When the new product’s demand is highly price elastic even early in the pioneering stage.
- When the marketer can realize substantial manufacturing and marketing economies if he obtains a large sales volume (such economies bring down average total costs).
- When the marketer expects strong competition very soon after introducing the product, i.e., when he expects the product’s market pioneering stage not to last long.
- When there is little or no ‘elite’ market for the product in a market segment made up at buyers who will probably buy regardless of price.
Competitor’s Likely Reactions.
Probably the innovating marketer’s single most important consideration in choosing between price skimming and penetration pricing is the relative case, and speed with which competitors can launch their own version of their own products. For revolutionary new products which have large potential markets penetration pricing is usually the most appropriate strategy.
This is because the existence of a large potential market is almost certain to attract many large competitors soon after introduction of the innovation. Penetration pricing helps to discourage prospective competition, i.e., less profitable. Than if the innovating marketer tries a price skimming strategy.
If the marketer expects that competitors will need considerable time and will meet great difficulties in coming up with their own version of the product type, then, of course, price skimming is appropriate strategy, clearly, too, if the marketer’s new product is only slightly distinctive then as implied earlier, his best choice is penetration pricing at a price either at or very slightly above those of the competitive substitutes.
3. Follow the Leader Pricing –
In a competitive market, some big firms assume the role of a leader in pricing. When a company starts production such competitive product, it follows the pricing policy of such leader firms. It fixes the prices near about their prices which are generally lower than those of their leaders. This policy has no scientific and rational basis for fixing the prices.
Attraction of the Policy:
- This policy is suitable when competitive situation exists in the market.
- Small firms which cannot afford various market survey techniques generally follow the big firms, on the assumption that big firms in the field have broad marketing research base and their prices are more scientific.
- Such pricing is successful when buyers are price-conscious.
This policy has no scientific base. Cost of the product and other marketing factors are not considered at all under this policy.
A. Contrast the pricing strategies during market growth of:
(i) The innovating marketer, and
(ii) His competitors.
B. What do you understand by non-price competition during market growth ?
Pricing Strategy During Market Growth:
Innovating Maketer’s Pricing Strategy –
In the market growth stage for a product of perishable distinctiveness, the innovating marketer’s pricing strategy must take direct account of the pricing strategies of his competitors as one by one they enter the market. If the innovator used price skimming during the market pioneering stage, he may either switch to penetration-pricing when significant competition first appears, or alternatively, reduce his pr:ce in several successive steps as more competitors enter the broadening market.
If he used penetration pricing during market pioneering he is likely to continue with that strategy during the market growth stage. In either case the innovator’s main pricing objective during market growth is generally that of retaining a particular market share.
Pricing Strategies of Competitors entering during Market Growth Stage –
Competitors new to the market take note of the innovator’s pricing strategy and tend to price with the objective of gaining and holding some target market share. If the innovator has been using pricing skimming, the first few competitors to enter the market may seek to “under price” him slightly and as he steps down his price some try to “keep one jump ahead” by timing their price cuts, also in steps so as to precede his.
Competitors entering the market later, during market growth are much more likely to use penetration pricing from the outset. If the innovators has been using penetration pricing all along, generally all new competitors than have no choice but to do the same though it is not necessary that all use identical penetration prices.
Non-Price Competition During Market Growth:
While each marketers pricing strategy becomes increasingly dependent upon those of his competitors during the market growth stage non-price competition also increases. Different competitors seek to gain advantages through promotional efforts changing or improving the product, extending its distribution and the like.
Those that succeed in becoming leading brands often also succeed in pricing their entries at a ‘price above the market’, e., they find it possible to use a premium pricing strategy. Those that do not succeed in becoming leading brands, must generally price either at competitive levels or under that level. Hence each competitor in making his own pricing strategy considers not only the non-price components of his own overall marketing strategy but those of his competitors.
As market growth proceeds, all competitors find that both their pricing and overall marketing strategies are increasingly interlocked.
Pricing Strategy during Market Maturity –
Under market maturity stage a product of perishable distinctiveness loses its distinctiveness.at an increasing rate. Brand becomes more and more alike and there is increasing substitution among brands. Market shares among brands to stabilize and in the contest to maintain market shares, leading brands cannot command as large a price premium as before.
As production methods stabilize and as individual manufacturers develop excess production capacity, private-label competitors enter and secure important market shares usually by offering private labels at under the market prices.
The net effect of these developments of pricing strategy depends chiefly on the case of entry into the market and on the number of competitions. If market entry is difficult and the number of competitors is small, an oligopolistic pricing situation may then develop if it has not done so during – marketing growth. If market entry is easy and the competitors are large then monopolistic competition prevails and governs individual marketer’s pricing strategies.
Write notes on :
(a) Oligopolistic Pricing
(b) Pricing under Monopolistic CogipcMion
(c) Runout Strategy
(A) Oligopolistic Pricing
From product of perishable distinctiveness an oligopolistic pricing situation may develop either during a late phase of market growth or an early phase of market maturity. A. oligopoly by definition is a market situation in which the number of sellers is limited and each has a significant effect on the market price. Each, therefore, in making price changes must consider the likely effect on competitors.
(B) Pricing Under Monopolistic Competition
Under monopolistic competition the range of different marketer’s prices narrows; some manage to obtain premium prices providing their brands retain. Some distinctiveness and, or if they succeed in keeping various non-price advantages gained during the market growth stage.
But the amount of a market price premium cannot exceed the average price by much or the marketer loses market share as ‘fringe’ buyers switch to lower priced
substitutes. If a market’s brand loses its distinctiveness to the extent that it becomes indistinguishable from many competiting brands he may be forced to lower its price below the market average.
Yet greater flexibility in pricing strategy is possible under monopolistic Competition than under oligopolistic competition. The number of competitors is large’ and a price change by anyone tends to effect each of the others only slightly. If one competitor cuts the price, he may increase his sales, while each of his competitors loses only a small amount of business.
Hence unlike under oligopolistic competition the chances are against a price cut inviting instant retaliation by competitors. Still a marketer thinking a price cut must consider the ever present possibility that too drastic a reduction may set off a price war with the impact spreading from one company to another throughout the whole industry.
(C) Run out Strategy
During the market decline stage, a product is of little or no distinctiveness. By the time this life cycle stage is reached the number of competitors has divided enough, still a few remain in the field. There must be some reasons for this A marketer may keep such a product in his line offering for any of several reasons, he may need it to ‘round out’ his line, if may have a ‘hard core’ market that continues to insist on buying it, if may still be profitable.
Marketers of products in the declining stage generally price them competitively hoping to get the sales volume large enough to return a profit.
But if the product has a sizeable hard core market, the marketer may even raise his price a bit. In this way obtaining a slight premium price; at this point he may also have promotional costs to be borne and in this way may realise considerable profit though this run out strategy.
W.J. Talley describes a “runout strategy involves a marketer cutting back all support costs, such as promotional costs to the minimum level that will optimize the products, profitability over its limited foreseeable life.”
Explain briefly the pricing policies to be used in different stages of the life cycle of a product.
Pricing In Different Stages Of Life-Cycle Of a Product:
We have already discussed in previous question that a product has six stages of its life cycle viz.
Different pricing policies are adopted at different stages of a product’s life cycle. These policies can be explained as :
1. Pricing a Introduction Stage –
At this stage, a new product is introduced into the market and intensive advertising compaign is launched to make the public familiar with the product. At this stage of product life cycle, either of the two strategies may be adapted – Skimming the cream pricing and low penetration price strategy.
Under first strategy, a very high price is fixed for the products and under penetration pricing, low price is fixed for the product depending upon the market conditions. If market condition is not competitive e.g., the product is quite new or there is no substitute, Skimming the cream strategy may be adapted. If there is tough competition, Penetration strategy should be preferred.
2. Pricing under Growth –
At this stage of product life cycle, the demand and sales volume of the product go up. The customer prefers the product to other products available in the market. The producer should be very careful at this stage in determining the price because it is the time when the firm can earn the maximum profits through maximum sales.
The producer in determining the price at this stage must consider the pricing policy of the competitors. If the existing price may be reduced at this stage, maximum benefit can be taken of the increasing popularity of the firm. If the producer feels that there is no close competition, price of the produced may be raised slightly. Stress should be for intensive and extensive advertising.
3. Pricing under the Stage of Maturity –
At this stage the sales of the product continue to increase but at a lower rate. It is because at this stage new competitors enter the market with superior quality product. The customers shift their brand loyalty to other new and superior products. The popularity of the enterprise begins to fall.
At this stage, low price must be determined to check the customers shifting to new brand. The enterprise must also stress upon marketing research and product research so that a new improved product may be introduced in the market. Efforts should also be made to develop new uses of the product so that some customers may be attracted to the product.
4. Pricing under the Stage of Saturation –
Under this stage of product life cycle, the total sales volume becomes stagnant. At this stage price of the product should be kept lower or reduced to a great extent, if possible. In addition to it. the efforts must be made to change the physical and chemical attributes of the product so that it may look better.
5. Pricing under Decline –
In the declining stage, the sales of the product continuously go declining inspite of the best selling efforts. The hope of future sale becomes almost nil. At this stage the producer must use Break-even pricing. Policy of price-differentiation may also be adapted at this stage.
6. Policy under the Stage of Obsolescence –
At this stage, demand and sales of the product are reduced to a minimum low and possibilities of future sales are also bleak. Continuance of such product will cause loss to the firm. At this stage of life cycle, it is better to discontinue the production of the product in order to avoid losses and use the resources to other profitable products.
This different pricing policies are required to be adoped under different stages of a product life cycle. The main.aim is to maximise, or maintain the price of the product.
What do you understand by price discrimination ? Explain the conditions which make it possible and profitable. Is price discrimination anti-social ?
Why does a producer charge different prices from different customers ?
Generally a producer charges only one price for his product from all customers. But sometimes, a producer charges different prices from different customers for the same product. This situation is known as ‘price discrimination.’ It has been experienced that even monopolist charges different prices from different customers for his product provided those people belong to ‘different markets’ or to different non-competing groups. Thus, charging different prices from different consumers for the same product is known as ‘price discrimination’.
Mrs John Robinson has defined the term as, “The act of selling the same article, produced under a single control, at different prices to different buyers is known as price discrimination.”
According to Prof. J.S. Basin, “Price discrimination refers strictly to the practice by a seller of simultaneously charging different prices to different buyers for the same goods.”
Causes or Objectives of Price Discrimination – Price discrimination is possible because of the following reasons –
- Ability to pay
e.g. charging more from rich and less from poor. For example, railway charges more from passengers prefer to travel in first class and’less as compared to those in second class.
- Geographical Location –
e.g. charging different prices in different markets or market segments on the basis of location.
- Intensity of Demand –
e.g higher charges can be made at places where intensity of demand is higher. A monopolist charges price of his commodity on this basis.
- Market Conditions –
Price discrimination is possible only in monopolistic and imperfect market conditions. In a perfect competitive market, price discrimination is not possible.
- Time –
Prices of the commodity may vary by season, day, or even by hour of the day. For example, telephone rates are different for day hours and night hours or for holidays and working days.
- Use –
Prices may be charged differently for different uses. When a product is purchased for medicine, higher prices may be charged. When it is purchased for general purpose, the price may be lower
- Maximum Utilisation of Plant –
With a view to utilise the plant at its full capacity, prices may differ. For example, price for exports may be charged lower.
Types of Price Discrimination.
Some of the important types of price discrimination are as follows:
(i) Personal Price Discrimination –
When different prices are charged from different persons or group of persons. Railways charge different fares from different classes of passengers. They are higher for First class whereas lower for Second ( lass passengers or a company sells its product at a lower price-to its shareholders, employees, friends and relatives of directors’ proprietors etc.
(ii) Geographical Price Discrimination –
When different prices are charged from customers of different places, it is geographical price discrimination.
For example, prices for Eastern, Western, Northern and Southern zone may be different.
(iii) Price Discrimination According to Use –
When different prices are fixed for a product on the basis of use, it is price discrimination according to” use. For example, Electricity company fixes different rates for domestic and industrial use.
(iv) Glass Price Discrimination –
When a product is used by different classes of consumes, different rates may be charged for the product for each class. For this different packs may be available for different classes.
(v) Time Price Discrimination –
When different rates are charged for different times; it is time price discrimination. For example, Telephone department charges different rates for day and night calls.
(vi) Price Discrimination According to Facilities –
When different rates are charged from different consumers on the basis of facilities available to them, it is called price discrimination according to facilities. For example. Railway charges different tares for First class journey, Second class journey and Air Conditioned journey.
(vii) Price Discrimination by offering Discount –
Price discrimination may be made by offering different rates of discount on the basis of quantity purchased by them or on the basis of cash paid by them, it is called price discrimination by offering discount. For example, different dealers may be offered different discount on the basis of quantity of goods purchased. Different discounts may be offered to those purchasing for cash and to those purchasing on credit.
Conditions For Price Discrimination:
The following main conditions are essential to make price discrimination possible and profitable.
(i) The elasticities of demand in different markets may be different. Then the monopolist can go no dividing and subdividing his markets. No two buyers with different elasticity put in the same group, or till in each market- the elasticity of demand, is the same.
The monopolist will find it profitable to charge more in the market where elasticity is low and low price where it’ h high. To quote Mrs. Robinson. “The sub-markets will be arranged in ascending order of their elasticities the highest price being charged in the leas: elastic market, and the lowest price.in the most elastic market.”‘
(ii) The costs incurred in dividing that market into sub-market and eping them separate should be so large as to neutralise the difference in demand elasticities.
(iii) Discrimination is possible when goods are sold on speical orders, because then the purchaser can not know what is being charged from others:
(iv) It will not be possible to transfer from one market to another any unit of the commodity sold in one market –
This is the case when services are rendered direct to consumers, e.g., by teachers, lawyers, doctors, etc. or services applied direct to commodities, e.g., transportation by railways. Transference may be obstructed by high transport costs or high tariff charges or by contracts penalising resales.
(v) It will not he possible to transfer a unit of demand, proper to one market, to another market –
This happens when markets are spilt upon the basis of wealth. A rich man cannot become poor simply to enjoy fee concession. A silk merchant cannot become a coal merchant to avail of lower freight rates.
(vi) In Monopolistic Conditions –
Price discrimination can be adopted easily. The monopolist may charge different prices for the same product in different markets or from different customers.
(vii) A very common situation in which the price discrimination can be adopted, is the situation of monopoly created by making an agreement among all competitors to sell the product not below a certain price for the product in a particular market. They may agree to charge different prices from different customers. This is called a created situation of monopoly.
(viii) Ignorance of consumers offers an opportunity to the manufacturers or retailers to charge different prices’ from different customers. In other words, price discrimination is possible in imperfect competition in the market.
(ix) Difference in purchasing power of different groups of consumers allows the manufacturers to charge different prices from different consumers or groups of consumers. Manufacturer can charge higher prices from those having higher purchasing power and lower charges from those having lower purchasing power.
(x) Government policy is also responsible for price discrimination. For example, rafts of electricity is different for domestic and non-domestic use of the product pr different rates or telephone calls For day and night call. Similarly different rates for sugar, wheat etc. have been fixed by the Government of sale in open market and sales through f air Price shops.
Is Price Discrimination beneficial to Society ? –
In certain cases, price discrimination may be to the advantage of a community, for instance when a particular product or service may be very useful to she community. If the price is fixed low enough for the poorer classes, production costs may not be due to absence of normal profits per unit. If the price is fixed too high, the total receipts again may be low due to meagre sales.
The commodity’ may, therefore, not be produced.at all. At any rate, some output may be held up, because average revenue in a discriminating monopoly is greater than order simple monopoly,it may happen for instance, that a railway would not be built or doctor would not be set up in practice, if discrimination were forbidden, ft is clearly desirable that price discrimination should be permitted in such cases.
If discriminatory prices are charged the total receipts may be adequate to meet the total cost with profit. Thus everyone may gain from the production of such a commodity when discriminatory prices are charged.
Since discrimination involves rising the price for some people and lowering for some others, it is obvious that price discrimination is beneficial to some and harmful to others. But the net effect on social welfare will depend on which group the society likes to favour.
If the price is lowered for the ‘masses’ and raised for the ‘classes’ the society has nothing to regret, for such an arrangement is obviously intended to promote economic welfare. But in the case of geographical discrimination it is also possible that the less elastic market (for whom the price is raised) may be the home market whereas the market abroad may happen to be more elastic and them the price will, therefore, be lowered.
In a case like this the foreigners gain at the expense of the nationals of the country. Such a price discrimination is clearly determental to the community concerned. There is, however, one qualification, f the industry obeys the law of increasing returns (or diminishing marginal costs) even the less elastic market will gain from the larger output (at reduced costs) in discriminating monopoly than under simple monopoly. Thus dumping abroad is likely to lower the price for the home market too and thus benefits the country concerned.
Mrs. Robinson thus concludes –
“From the point of view of society as a whole it is impossible to say whether price discrimination is desirable or not. From one point of view therefore, price discrimination must be held to be superior to simple monopoly in all these cases in which it leads to an increase of output, and these cases are likely to be the more common.
But against this advantage must be set the fact that price discrimination leades to a maldistribution of resources as between different uses….. Before it is possible to say whether discrimination is desirable or not, it is, therefore, necessary to weigh up. the benefits from the increase in output against these disadvantages. In those cases in which discrimination will decrease output it is undesirable on both counts.”
When discrimination takes the form of dumping, it is regarded as an obnoxious practice.
Thus, in the following cases, price discrimination cannot be said to be justified :
- when monopolistic profit is the aim of price discrimination.
- where aim is to earn maximum profits rather than to earn a reasonable profit.
- where price discrimination encourages unequal distribution of weather.
- where price discrimination results in misuse of natural resources and exploitation of public.
- when it creates dumping situation.
- When it creates unhealthy competition.
Do yon agree with this that Resale Price Maintenance is clearly to the disadvantage of the consumer ? Explain.
Write short note on Resale Price Maintenance.
Resale Price Maintenance:
Maintenance of resale price is a controversial subject. The terms
‘resale price’ and ‘retain, price’ are often used synonymously. But this is incorrect that resale price maintenance is a policy adopted by a manufacturer . whereby he fixes a price for his product to be sold to customers by retailers.
Retail price is that price at which a retailer sells the product to his customer. Usually, the retailer sells his product on the basis of cost plus expenses, plus his margin of profit. By reducing his own margin, a retailer is free to sell the product at any price he deems fit, considering the market conditions.
But resale price maintenance is an arrangement of a contract entered into between the supplier and the reseller (wholesaler or retailers). The contract normally stipulates a condition that the reseller will have to sell the product at a price fixed by the supplier. In case the dealer does not maintain the specified prices, the supplier will even withhold further supplies.
Normally strict enforcement of the suggested price is possible only when a manufacturer uses a selective or exclusive distribution system. Another condition for such an arrangement is that the particular brand should have achieved a high degree or customer acceptance and popularity.
In India resale price maintenance is controlled through MRTP Act. This Act elaborates the term of‘Resale price maintenance’as follows :
“Resale price in relation to sale of goods of 2ny description means any price notified to the dealer or otherwise published by or on behalf of the supplier of the goods in question (whether lawfully or not) as the price or minimum price which is to be charged on, or is recommended as appropriate for a sale of that description or any prescribed or purporting to be prescribed tor that purpose by any contract or agreement between the wholesaler or retailer and any such supplier.”
Resale price is fixed in any one of the following ways :
- A minimum price below which the products cannot be sold.
- A maximum price above which the products cannot be sold.
- A stipulated price from which no changes are allowed
According to MRTP Act, the first and the third are restrictive trade practices. The second one normally allow a flexibility for the retailer to fix the filial price. Hence it is not treated as a restrictive trade practice.
” The original ideas behind the RPM (Resale Price Maintenance) was to avoid unhealthy competition by retailers but later this became a source of additional profit for the manufacturers through exclusive or selective distribution system. Through these systems of distribution a sort of brand monopoly could be developed and a high price could be charged from the consumers. Furthermore such a practice caused hardship to small scale organisations and in certain cases led them even to their extinction.
Resale Price Maintenance is to the Disadvantage of the Consumer. The Resale Price Maintenance is injurious to the interest of the consumers, however, they get the product at a fixed price. But, the fixing of such a minimum price cannot be justified on the following grounds :
- The producer adds the remuneration of the middlemen at the highest rate permissible. But, actually all middlemen are not paid with that raid. Their remuneration is fixed through agreement.
- If prices of a product are reduced, the advantage is not given to the consumers because they cannot sell the product at a lower price.
- If the last retailer gets his supplies direct from the producer and thus removes the other middlemen, he would be eligible to the other middlemen’s remuneration too. Consequently, if he desires to reduce the price by passing on the additional remuneration to consumers, he cannot do so.
Thus, this policy.is against the consumers’ interest. In order to safeguard the interest of consumers, the government has imposed a restriction to fix the Resale Price Maintenance by Section 39 of the Monopolistic and Restrictive Trade Pracitces Act .(MRTP) and it has been declared an offence. This is the reason as to why the producers fix the maximum price of their products and the retailers are free to charge any price below that maximum. ‘
Describe the provisions of the law in so far as they relate to regulation of price.
Laws Relating To Regulation Of Prices:
We have already discussed various pricing policies end strategies for determining the price of a product. But, while deciding pricing strategies, it is also important to keep in mind the legislative provisions regarding price fixation. The Government has provided for a number of restrictions in fixing prices for different commodities. It is really important because of the following reasons – short supply of goods as compared to their demand, unreasonable level of prices, unfair trade practices, low level of income of a large number of people and black marketing. In India, a number of legislatures have been introduced to regulate the prices of the commodities. The legislations are :
- Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act 1969)
- The Consumer Protection Act, 1986.
- The Essential Commodities Act, 1955.
- The Prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act, 1980.
- The Drugs (Control) Act. 1950.
- The Industries (Development and Regulation) Act, 195!.
- The Standards of Weights and Measures (Packaged Commodities) Rules, 1977.
The provisions of these legislations in so far as they relate to price control 3re being discussed hereunder in detail.
I. Regulation of Pricing under MRTP Act.
There are certain practices followed by traders (manufacturers, wholesaler, retailers) in India that are determental to the interest of consumers have been regarded as Restrictive Trade Practices under the MRTP’Act, 1969. The Act seeks to prevent these practices including pricing practices indulged in by sellers (manufacturers, and middlemen) who tend to manipulate prices intending to exploit the poor consumers. The following provisions have been made in the Act to prevent these unfair pricing practices –
1. Resale Price Maintenance –
With a view to exercise control over the price to be charged on the resale of his product, a manufacturer stipulates the price to be charged by the dealers. Such a stipulation may be either through suggested resale price or fixed resale price. Suggested resale price is a stipulation where the manufacturer insists that his product should not be sold below the price fixed by him.
In other words, it means that a reseller may sell the goods above the suggested price. This practice, however, eliminates the competition among dealers and distributors, but at the same time it exploits the consumers because the seller charges the price not below the price suggested by the manufacturer and thus the consumers are deprived of benefits which may accrue to them because-of price competition among sellers. Sellers sell the goods only above the suggested price.
It protects the interest of the manufacturer and dealers. In case of Fixed Resale Price, prices are indicated on the product and the seller charges that fixed price neither less nor more. These resale price maintenance practices are restrictive trade practices in so far as they are detrimental to the interest of consumers. The MRTP Act prohibits the fixation of Minimum Resale Price.
The MRTP Act provides that any agreement of sale between a person and a wholesaler or retailer shall be void if its objective is to provide for the establishment of minimum prices to be charged on the resale of goods in India. No supplier of goods can notify directly or indirectly to dealers or otherwise publish a price stated to.be understood as a minimum price for resale of goods in India.
The Act further lays down that no supplier can withhold supply of any goods from any wholesaler or retailer if the wholesaler or retailer seeks to obtain them for resale in India. Contravention of provisions relating to the prohibition of the minimum resale maintenance price will attract a fine up to Rs. 5,000 or imprisonment for a period not exceeding three months or with both. The Commission (M^TP. Commission) however, is empowered to exempt any class of goods which it deems fit in the interest of the consumers.
Thus, the manufacturer, however can fix the maximum resale price above which the product cannot be sold. It provides a flexibility for the retailers to fix the final price. In this case, the retailers can sell the goods even below the suggested price and the consumer may take the benefit of price competition in the market. The retailer can sell the product at less than the suggested price by cutting his margin of profit. This practice, therefore, is not a restrictive trade practice.
2. Price Discrimination –
Price discrimination is a practice where the manufacturer or middlemen charges higher price from one buyer and lower price from another buyer or dealer. This discrimination in price can be made either by fixing or charging different rates from different buyers or by granting discount, allowance, rebate, commission at different rates to different buyers.
This had an adverse effect on competition because the persons who have purchased the goods at higher rate cannot compete effectively with those who have purchased the goods at lower price or at a higher discount. Granting quantity discount or favourable terms of sale or delivery in excess of what is justified by cost saving in bulk supply, the seller in effect, is charging lower price from bigger dealer.
This adversely affects the competition. It, therefore, amounts to restrictive trade practice under the MRTP Act. For such a practice, the MRTP Commission can make an inquiry and pass an order appropriate against the party indulging in the practice. The Commission “cease-and-desist” order has the statutory backing like that of a Civil.Court. The Commission is also empowered to award compensation against the loss or injury suffered by any person or class of persons as a result of such trade practice.
3. Collective Price Fixing –
Sometimes manufacturers and suppliers
of goods and services enter into an agreement or understanding to eliminate competition among themselves, by fixing common price and other terms of sale for their products and sources. They form a formal or informal carter which can envisage a uniform price throughout the market..Collective price fixing may take two forms—(a) Collusive tendering and (b) Collusive bidding.
(a) Collusive Tendering –
Under this practice, the buyers or sellers of goods and services secretly agree on the prices or other terms and conditions of sale or purchase, to be quoted in response to a tender. They would quote such rates as would make the offer of pre-determined tenderer acceptable. This would result in unduly high prices for supply of goods. The opposite would be a situation when the tenders invited are for the disposal of any product. In that case the rates quoted will be too low.
(b) Collusive Bidding –
This practice is prevalent in auction sale/ purchase. Under this practice, the buyers counteract the efforts of seller to get the highest price. They (buyers) agree secretly among themselves on the price or other terms and conditions of sale/purchase of goods or services to be offered at the auction. The buyers share the gain on such purchase as per secret agreement.
Thus, both the above practices under collective bargaining have the aim of restricting or eliminating competition which amounts to a restrictive fade practice. The provisions for regulation are the same as discussed under Price Discrimination.
4. Predatory Pricing –
This type of practice is followed to eliminate or reduce competition. In such a case, a manufacturer/supplier fixes the price „ of his product or service too low or even below cost incurred by the manufacturer/supplier with the intention of driving out the competitors and eventually making the monopoly profits. By doing so, the marginal or weak competitors go out of the market and .the manufacturer later increases the prices of his product.
This is also a restrictive trade practice which amounts to eliminate competition and create monopoly situation. The regulatory provisions of this practice are the same.aS discussed under Price Discrimination.
5. Bargain and Deceptive Pricing –
Sometimes the seller attracts buyers on false promises. A particular price is offered through slash down price just to lure the buyers. When the buyer reaches the showroom, the dealer will either avoid the sale or disperage its features or demostrate a defective price of goods to dissuade the buyer to buy the advertised goods and then persuade the buyer to purchase any other brand of the same product. This is deceptive pricing and bargain pricing tend to mislead the buyer. Such practice is a restrictive trade practice. The MRTP Commission makes an inquiry into the said practice and if it finds the practice deceplive,’it passes order against the party concern.
(b) Charging of Unreasonably High Prices –
Sometimes, a company of good repute, and which is in a position to control production, supply or distribution of goods and services and is in a dominant position in a market, charges a very high prices for its product. This is also a restrictive trade practice. The MRTP Commission, on being satisfy can issue a prohibitory order. Apart from it, the Central Government may take any other step necessary to curb such practices.
II. Regulation of Pricing under the Consumer Protection Act-
Under the Consumer Protection Act, 1986, there are two types of pricing practices
(i) Excessive Pricing,
(ii) Deceptive Pricing.
(a) Excessive Pricing –
Under this practice the supplier charges an excess price from consumers in any of the following manners –
- price charged is in excess of the price fixed under any law; or printed or displayed on the goods; or
- Price charged is in excess of price displayed on the package or container.
Such pricing is sought to be regulated through District Consumer Disputes Redressal Forums set up in each State, State Consumer Dispute Redressal Commission, set up in each State and the National Consumer Disputes Redressal Commission, New Delhi. These bodies take action on the complaint recevied from an individual, consumers association or the Central – and State Governments.
These have wide powers of Special Courts set up for the redressal of grievances of consumers against sellers in relation to supply of defective goods, deficient services, charging of excessive prices and indulging in any unfair trade practice. There bodies have powers to replacement of goods, return of the excess amount charged, awarding by any consumer or group’of consumers.
(b) Bargain and Deceptive Pricing –
The practice has already been discussed under MRTP Act. But MRTP Act does not apply to Public Undertakings, Government managed Private Undertakings, Financial Institutions and Cooperative Societies. The Statutory Forum and Commissions under the Consumer Protection Act can take actions for bargain and deceptive practice. Charging excessive price or anything which mislead public, attract penalties under the Act.
III. Regulation of Pricing under the Essential Commodies Act 1955 –
Hoarding and black-marketing are very common in India during shortage of goods in the market. The unscrupulous businessmen create artificial scarcity for more profit. To prevent such a practice, legislative measures have been incorporated in the Essential Commodities Act. Under this Act, there are two types of provisions –
(i) fixing the price of essential goods, and
(ii) regulation of pricing food items.
(a) Fixing the Price of Essential Commodities – Under this provision, the Government (Central or State) can fix the price of goods acquired by it. On such cases, the seller shall be paid as determined in the following manners:
- Agreed Price –
Where the price is agreed upon by the Government and the seller in consistent with the controller price, if any price fixed under this sector, the agreed price to be paid.
- Controlled Price –
It will be paid to the seller where there is no agreed price.
- Market Price –
Where there is neither agreed nor controlled price, prevailing market price will be paid to the seller.
(b) Regulation of Price of Food Items –
The Central Government, has been empowered by the Act to regulate the selling price of foodstuffs in any part of the country, if the Government thinks that rise in price of foodstuffs is due to black marketing or hoarding. The price shall be determined in accordance with the provisions given in the Act. These measures have been .further strengthened by enacting the Prevention of Black Marketing and Maintenance of Supplies of Essential Commodities Act, 1980 by providing stringent measures.
IV. Regulation of Pricing under the Drugs (Control) Act, 1950 –
Under this Act, the Government is empowered to control the prices of drugs in India. The Government under this Act can fix the maximum price to be charged by a dealer or producer in respect of any drug.
V. Regulation of Pricing under the Industries (Development and Regulation) Act, 1951 – The Central Government is empowered to regulate the supply, distribution, and price of any commodity in respect of any scheduled industry (as listed in Schedule I of IDRA) by a Notification issued by the Central Government. A notified order made in respect of price may provide for :
(i) Controlling prices at which any such article, or class of article may be bought or sold.
(ii) Regulating any person manufacturing, producing, or holding in stock such article or class of articles thereof to sell the whole or part of the article so held in stock to such person or class of persons and in such circumstances as may be specified in order :
- where the price can, consistently with the controlled prices, if any, be fixed by agreement, the price so agreed upon.
- where no such agreement can be reached, the price calculated by reference to the control price, if any, fixed under the Act.
- Where neither Clause (a) or Clause (b) applies, the price calculated at the market rate prevailing in the locality at that date.
The Bureau of Industrial Costs and Pricing (BICCP), advises the Central Government on Industrial Costs and Pricing of manufactured products. The Government determines the prices of a number of products on the basis of recommendations of the BICP. BICP also monitors and has also been entrusted with the task of infrastructure pricing.
VI. Pricing under the Standards of Weights and Measures (Packaged Commodities) Rules, 1977 –
Under the Standards of Weights and Measures (Packaged Commodities) Rules,’1977; manufacturers and packers of all commodities sold in packed form are requirec to provide the following particulars, conspicuously marked on every package –
- Name are address of the manufacturer or packers.
- Common or generic commodity contained in the package.
- Net quantity, the month and the year of manufacture.
- Selling price (inclusive of all taxes).
- Dimensions of the commodity, if relevant.
Thus, now it is obligatory on the part of producer to display the maximum retail price inclusive of all taxes, on all packaged commodity offered for sale.